The junior ISA will be introduced from the 1st of November 2011, allowing parents to invest up to £3600 tax free per child up until their 18th birthday. However unlike its predecessor, the Child Trust Fund, there will be no incentives or contributions from the government.

The Child Trust Fund was originally a Labour initiative, and was intended to build assets for all children regardless of their background in order build for the future. The labour government originally provided new born children with a £250 voucher under this scheme for banking with certain providers, with contributions up to £1,200 a year allowed tax-free.

Similarly to many adult ISAs, the money that is saved can be invested into equities so that customers receive the best possible return on their savings. A maximum of £3,600 can be saved every year either as a lump sum, or in payment form, from just £10 a month.

Popular Support

The coalition Government had originally planned to phase out these types of scheme, however popular support has led to the creation of the Junior ISA, albeit without any of the previous incentives included as part of a Child Trust Fund. 

A large number of savings providers have also committed to offering the product, including Fidelity, Shepherds Friendly and Family Investments. Contributions for these accounts are currently capped at £3,600, and they are only available to customers who were not previously eligible for the Labour initiated Child Trust Fund.

According to Natasha Terbraak of MyEggNest.com, ‘The Child Trust Fund vouchers helped encourage many parents who might not have started saving otherwise to build a nest egg for their children, and to take interest in the children’s savings market. Though the voucher scheme proved too expensive for the Government to justify preserving, tax-free accounts like the Junior ISA will still offer children who did not qualify for a CTF the chance to make large contributions tax-free, and hopefully rates will be competitive as new providers compete for new customers.’

She has also stated that: Ideally, we’d eventually like to see money from Child Trust Funds transferable to Junior ISAs, giving parents access to a range of competitive rates on the children’s savings market.’

University Fees Set To Rise

With university fees set to rise as high as £9000 in many areas, these junior ISA’s may provide parents with a more effective way of saving for the future. The financial secretary to the Treasury, Mark Hoban has stated that Junior ISA’s are a ‘simple, clear and jargon-free financial product that allows families to save and invest for their child’s future’.

Although lack of government input has led many to believe that Junior ISA’s may simply be used as a tax shelter by wealthier people with disposable income, Natasha Terbraak has argued that ‘the scheme could still help many put away money for future education costs – especially with the rise in university fees’.

Many people are also considering Child Tax Exempt Savings Plans or ‘TESPS’ that are offered by Friendly Societies, allowing £25 per month of tax free contributions, although these are generally intended for customers that wish to contribute smaller amounts every month. The Shepherds Young Saver Plan may also be of interest, allowing customers to invest as little as £7.50, with a maximum that is higher than the usual £100 a month offered by TESPS.

The Junior Isa will launch at the start of next month, with as many as 6 million children who are estimated to be eligible.